Tax-Free Income from Your Business?!

Anyone who has read my posts or spoken with me have always heard me say that PGI does not provide tax, legal, financial or investment advice….and, this blog is no exception to that. But, if you interested in receiving tax-free income from your business and implementing this strategy, it is imperative that you review the permissiveness of this strategy with your tax professional. Disclaimer now noted!

While I rarely do blogs on topics not related to self-directed retirement plans (e.g., also marketed as a self-directed IRA, Solo-K, Uni-K, Individual 401(k)), this topic of receiving tax-free income from your business is so intriguing, I wanted to send it out to 401(k) clients and individuals interested in the topic. While many CPAs have noted the ability to use this strategy for your business…..again, please review this strategy with your tax professional should you have an interest in utilizing.

Did You Say Tax-Free Income from Your Business?

Yes, I did. And, while I would like to say that I came up with this potential tax-saving option….I didn’t. A PGI client (Todd — and shout out to you Todd for the strategy and your on-going friendship) was at a professional convention for his line of business and visited with a highly-respected CPA in attendance. The CPA informed Todd about the ability to schedule business meetings at his personal residence and, provided he complied with certain rules, be paid rental income from him business…tax free! Needless to say, Todd was interested. But, what IRS rule would potentially permit someone to receive rental income….tax free!

Welcome to…”The Augusta Rule” (IRC Code 280A(g))

(Background: This IRS provision is commonly referred to as “The Augusta Rule”. For those of you who are not familiar with professional golf, there is an annual golf tournament called The Masters held in Augusta, GA. For years and years, many residents would rent their homes to patrons attending The Masters…typically at rental fees up to $25,000 (or more) per week. Probably the majority of these residents (over the years) have taken advantage of a little-known IRS Code that permitted these home owners to keep the rental income….tax free! Within the provisions of this tax code, the rental income received by the home owner need not be reported as taxable income to the IRS, provided certain conditions are met. Pretty sweet, eh?! (it should be noted that while the Code originally benefited these residents, the Code reference could be used by practically anyone (e.g., people who rent their homes for the Super Bowl, NASCAR events, college sporting events).

The Code reference, IRC 280A(g), is applicable to property owners who rent their property to other individuals for use. If certain conditions are met, yes, the homeowner can literally keep the rental income and not pay taxes on the rental income. Almost like literally taking the money and putting it in your pocket or savings account. Okay, for those of you who have the potential to rent out your home for such purposes, awesome; but, I am not hear to dissect IRC 280A(g) or talk to you about renting your homes. What I am here to introduce, is the position taken by many CPAs that you can utilize IRC 280A(g) (“The Augusta Rule”) to benefit your business and yourself. Specifically, the ability to receive tax-free rental income (personally) IF your business rents your residence for legitimate, business purposes.

If you Googled the term, “Augusta Rule”, you will see many references on the topic…most referencing to discussions related to Air BNB property owners. I mean the application of the Code to these individuals is significant, but, we are not here to discuss Air BNB. Rather, the potential for you to personally benefit by applying the interpretation of the Code to your business renting your residence for legitimate business purposes. Yes, provided you follow the rules, your business renting your residence and you receiving this rental income tax free!

Basic Tenets of the Augusta Rule?

The Augusta Rule permits an individual tax payer to rent out their property for no more than 14 calendar days each year…without declaring receipt of these monies as taxable income on their tax return! Yes, literally renting out the property, receiving the rental “income” and, figuratively putting the money in your pocket….tax free.

Yes, here is another disclaimer…remember, if you are wanting to implement this strategy, talk to your tax professional! Now, back to The Augusta Rule:

Example of how The Augusta Rule May be Applied

Todd is a self-employed business owner and he and his spouse own a business where both spouses materially participate in, and are compensated for, their respective roles in the business. Todd and his spouse also conduct a monthly business meeting (e.g., board meeting) to discuss operational aspects of the business. Todd understands that while he could conduct this business meeting at any location (e.g., hotel), he conducts the meeting at this home…I mean it is their home! If the meeting occurred away from his home, Todd knows his business would rent a facility and treat the expense as a business expense and, therefore, write-off the expenses for tax purposes.

However, many CPAs firmly believe that Todd and his spouse could choose to hold these meetings at their residence and have their business pay them personally for the rental of their home to conduct these business meetings. And…the rental fee paid can be received income tax-free! The business still treats the payment as a business expense, and the home owner (you) being able to treat this rental income as a tax-free benefit provided the transaction complies with all aspects of IRC Code 280A(g)!

Let’s say you conduct a monthly board/trustee meeting for your business. Let’s also assume that you could conduct these meetings at a local hotel and have your business pay the hotel rental fee. In this example, the business claims this as a business expense. With this opinion, the business pays you, and provided you comply with the IRS code, you receive the rental fee income tax-free.

This is where you might be saying “no way”, and where many CPAs will say “way”!

The meeting must be a legitimate and bona fide meeting with regular, business topics to be addressed

The meeting must be a legitimate meeting with members of the business present

The meeting must be a legitimate meeting with an agenda

The meeting must be a legitimate meeting with appropriate records (e.g., individuals in attendance, agenda items, actions to be taken (if any)), being kept

The rental fee paid/received must be legitimate. Legitimate in that the rental fee is commensurate for duration of the rental (e.g., how long you are renting) ,and the locale in which the meeting occurs. As an example, if your local hotel would charge $500 for a hotel room based on date/time duration and you pay a rental fee to yourself of $1,000….this isn’t going to fly in respect to being legitimate.

This is a legitimate arrangement….and, not a “wink/wink” arrangement.

Do you think I sufficiently emphasized the term….L E G I T I M A T E?

Now, this is just my “take”…it is a bit disappointing the IRS would have a “special rule” intended only to benefit “wealthy” people (generally speaking) not pay tax on this type of income. It’s not like they probably need that tax break….and, we are not talking about limited amounts of income. But, the Code is the Code. The rules are the rules. If it is available for you to use, then why not use it! As long as it is permissible, we should take advantage of what the Code permits us to do. And, who knows, your business may just be more successful by implementing a strategy to save tax dollars and requiring you to be more organized in conducing such business meetings.

As always, the information is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.